Matador Resources Co. has bolted on its largest deal yet in the Permian Basin in an agreement to acquire Advance Energy Partners Holdings LLC, with assets in New Mexico and West Texas. 

The independent is providing an initial cash payment of  $1.6 billion, with an additional $7.5 million total paid monthly in 2023 if the average West Texas Intermediate (WTI) oil price exceeds $85/bbl. On Tuesday, when the deal was announced, WTI was trading at $79.86/bbl.

“We have carefully managed and strengthened our balance sheet over time in order to be in a position for a special opportunity like this,” said CEO Joseph Foran. “I would say it’s more of a happy coincidence,” he told analysts during the conference call. “The company came to us and said, ‘Look, we think you’re the logical buyer. We need to sell this to fulfill other objectives.’” 

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Matador traditionally has focused on the oil and liquids-rich portion of the Wolfcamp and Bone Spring formations in the Delaware sub-basin. The company, said Foran, “evaluated this transaction based on rock quality, the strong existing production and cash flow profile, the potential reserves additions, the high quality inventory, the available midstream opportunities and the strategic fit within our existing portfolio of properties.”

Matador also develops oil and natural gas assets within the Eagle Ford in South Texas and the Haynesville Shale and Cotton Valley plays in northwestern Louisiana. In addition, it operates Pronto Midstream LLC, a midstream company.

Northern Delaware Heavy

The transaction with Houston-based Advance, a portfolio company of private equity firm EnCap Investments LP, is expected to be completed before the end of June. Once finalized, Matador would acquire roughly 18,500 net acres in the northern portion of the Delaware. 

The transaction also would add about 35 miles of infield gas and water gathering lines to Pronto. In addition, Matador would acquire three compressor stations. 

Pronto, whose operations are centered in Lea County, NM, would gain access with the Advance assets  to about 50 MMcf/d of natural gas takeaway capacity to the Waha Hub in the Permian through the Double E Pipeline operated by Summit Midstream Partners LP. 

In the first quarter of 2023, Matador expects the Advance acreage to produce 24,500-25,500 boe/d, 74%-weighted oil. Advance’s total proved reserves last year were estimated at around 106.4 million boe, 73% oil-weighted. 

Foran noted that among the highlights that attracted Matador to Advance’s acreage were the “cost savings associated with developing these assets via longer laterals on multi-well pads with centralized facilities, the midstream synergies with Pronto and the held-by-production status of the acreage.”

Engineering firm Netherland, Sewell & Associates Inc. assisted Matador staff in creating reserve estimates. 

‘Very Bullish’ On Advance Leasehold

The Advance assets include 203 net horizontal drilling locations. The acreage also has 20 net drilled but uncompleted wells.

“This is an area of the Northern Delaware Basin that has been very well developed in the Bone Spring targets predominantly, but also in the Wolfcamp A and B…,” said Executive Vice President Thomas Elsener of Reservoir Engineering. He discussed the assets on Tuesday during the conference call.

“…We think there’s upside potential in the Wolfcamp D,” he said. “That’s a nice target source rock that has been developed all across the basin and we do see that additional potential…Our average operated lateral length is expected to be close to 9,400 feet…”

Elsener said “there may be some opportunities as the acreage bolts on to some of our pre-existing properties to lengthen out some of those laterals…We’re very bullish on all these different zones.”

Houston-based Advance is operating one drilling rig to drill 19 net wells in the northern portion of Matador’s Antelope Ridge asset area in Lea County. Matador indicated that the estimated drilling, completion and equipment capital expenditures for running one rig on the Advance leasehold would be $300-350 million in 2023. Around $225-275 million is targeted to be spent from the closing date to the end of the year.